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Using news will make you a successful trader

2019-04-09 News No comment

When trading news, we need to ask three questions before each transaction: Is news important? Is this surprise big enough? Is this consistent with market sentiment?

Is this news important?

The first task at hand is to figure out what is important and what is not. The top three potential market economic data for any country, namely employment reports, retail sales, and manufacturing and service activity data, also known as ISM or PMI reports. In addition, gross domestic product [GDP] and inflation reports [consumer and producer prices] are also tradable. Non-tradable is a report like the Beige Book, because there are no specific figures to compare, the data is released weekly, and any Japanese or Swiss economic report is almost always overshadowed by the general sentiment of the market.

If you are having trouble determining if the data is tradeable, most Forex sites will list the impact each data may have on the currency. High-impact events are events we want to trade.

Is this surprise big enough?

The second question is the toughest of the three because it requires explanation, but the benefit is that the market usually explains it for you. According to experience, if the number is greater than or less than the predicted value of more than 5%, then this is considered a big surprise, but sometimes 2% of the surprise is enough to cause a huge reaction of the currency.

What should you do? Just wait and see how the market responds to the release. If the currency pair has hardly changed, chances are that the accident is not that important. If the currency pair rises immediately or falls like a stone, then the market is likely to be surprised. The key is to wait five minutes before entering the trade to ensure that the currency responds in the expected way. In other words, a positive surprise should push the currency pair higher, and a negative surprise should push it lower.

Does this kind of accident meet the market sentiment?

The third question is important because sometimes economic data is something that we usually expect to cause a major response, but for whatever reason, the bounce quickly disappears or the trader does not care at all.

This usually happens when other things cloud the data and drive general sentiment in the foreign exchange market. It may be risk appetite, US data or concerns about European issues. If economic data is unexpected or “fundamental” is consistent with market sentiment, it is a stronger deal. In other words, if the market wants to buy dollars and retail sales are strong, it usually gives foreign exchange traders a better reason to move the dollar higher. However, if the market is worried about the US economic outlook, because the Fed warns that there will be more trouble in the future, good data may not have much effect on the US dollar because it will treat it with suspicion.

It can be difficult to quantify persistent sentiment in the market, but mobile gains may be helpful because they measure current market trends by averaging a certain amount of past prices. If the data is good and the currency pair trades over a 50-period moving average on a 5-minute chart [or the data causes the currency to break through the moving average], then sentiment and fundamentals will be more likely to support trade. However, if the data is good and the currency pair trading is well below the 50-period moving average, then the general sentiment does not support economic surprises. In this case, we will not trade because we want as many key variables as possible to be in our interest.

All in all, we only want to trade important economic data, and a lot of surprises are enough to trigger a reaction to the currency, and only if the economic data is in line with market sentiment. With these guidelines, let me show you the speed and intensity of news transactions.

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